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Ponzi Scheme

Reviewed by Vineeth | Updated on Sep 30, 2020

Catalogue

Introduction

Ponzi schemes are investment schemes that are intended to cheat people. These schemes promise people a tremendously high rate of return on their investments. Ponzi schemes provide returns for those investors that invested in the initial days of launching the scheme by acquiring new investors.

Ponzi schemes are similar to pyramid schemes when it comes to the working procedure. Both use the investments from the new investors to pay early investors. Pyramid and Ponzi schemes will flutter in a matter of time when the pool of new investors are not found. This will dry up all the funds available, meaning there is no money for circulations, and this is when the scheme reveals that it is a scam.

Understanding Ponzi Schemes

Ponzi schemes are investment scams in which investors are assured of exceptionally high profits at little to no risk. Eventually, investors are duped of their money. Companies indulging in Ponzi schemes put all their efforts in attracting new investors to make investments, who will not realise that they are falling prey.

Once the money is collected from the new investors, the same is used to pay returns to the initial investors. Everything in the world has an end, so does the inflow of money from new investors. When this happens, the individuals running the scheme will run out of money and will not be able to pay their investors, and the scheme will fall apart.

Evolution of Ponzi Schemes

The origin of the Ponzi scheme dates way back to the year 1919. The Ponzi scheme is named after Charles Ponzi. He was known for his deception to convince people to invest their money. Charles Ponzi is recorded to have run the first-ever Ponzi scheme.

The, then, postal service had come up with international reply coupons. These coupons were allowing sending pre-purchase postage and attach the same in their correspondence. The receiver would exchange the coupon for priority stamps in their reply.

Continuous variation in stamp prices resulted in stamps being costly in a few countries. Ponzi had arranged agents in other countries to purchase cheap coupons and send them to him. He then exchanged them for stamps of higher value. These stamps were then sold for profit.

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